Tax Planning

This query is : Resolved

roopa (Querist)
Follow

06 December 2007 Hi,

Can anyone let me know what are the provisions to be looked into while doing Tax planning for a Construction Firm.

KAUSTUBH M JOSHI

KAUSTUBH M JOSHI (Expert)
Follow

06 December 2007 Please give details regarding the type of construction i.e. civil or commercial construction firm is yours.
What kind of planning you require (Income tax, service tax, sales tax, works contract, WCT TDS) in what field please specify

R.V.RAO

R.V.RAO (Expert)
Follow

06 December 2007 Tax planning involves conceiving of and implementing various strategies in order to minimize the amount of taxes paid for a given period. For a small business, minimizing the tax liability can provide more money for expenses, investment, or growth. In this way, tax planning can be a source of working capital. According to The Entrepreneur Magazine Small Business Advisor, two basic rules apply to tax planning. First, a small business should never incur additional expenses only to gain a tax deduction. While purchasing necessary equipment prior to the end of the tax year can be a valuable tax planning strategy, making unnecessary purchases is not recommended. Second, a small business should always attempt to defer taxes when possible. Deferring taxes enables the business to use that money interest-free, and sometimes even earn interest on it, until the next time taxes are due.

Experts recommend that entrepreneurs and small business owners conduct formal tax planning sessions in the middle of each tax year.

General Areas of Tax Planning

There are several general areas of tax planning that apply to all sorts of small businesses.
These areas include
1. the choice of accounting and inventory-valuation methods,
2.the timing of equipment purchases, the spreading of business income among family members,
3. selection of tax-favored benefit plans and investments.
4.There are also some areas of tax planning that are specific to certain business forms—i.e., sole proprietorships, partnerships, C corporations, and S corporations.
Some of the general tax planning strategies are described below:

ACCOUNTING METHODS.
Accounting methods refer to the basic rules and guidelines under which businesses keep their financial records and prepare their financial reports. There are two main accounting methods used for record-keeping: the cash basis and the accrual basis. Small business owners must decide which method to use depending on the legal form of the business, its sales volume, whether it extends credit to customers, and the tax requirements set forth .
The choice of accounting method is an issue in tax planning, as it can affect the amount of taxes owed by a small business in a given year.

Accounting records prepared using the cash basis recognize income and expenses according to real-time cash flow. Income is recorded upon receipt of funds, rather than based upon when it is actually earned, and expenses are recorded as they are paid, rather than as they are actually incurred. Under this accounting method, therefore, it is possible to defer taxable income by delaying billing so that payment is not received in the current year. Likewise, it is possible to accelerate expenses by paying them as soon as the bills are received, in advance of the due date.
The cash method is simpler than the accrual method, it provides a more accurate picture of cash flow, and income is not subject to taxation until the money is actually received.

In contrast, the accrual basis makes a greater effort to recognize income and expenses in the period to which they apply, regardless of whether or not money has changed hands. Under this system, revenue is recorded when it is earned, rather than when payment is received, and expenses recorded when they are incurred, rather than when payment is made. The main advantage of the accrual method is that it provides a more accurate picture of how a business is performing over the long-term than the cash method.
The main disadvantages are that it is more complex than the cash basis, and that income taxes may be owed on revenue before payment is actually received.
However, the accrual basis may yield favorable tax results for companies that have few receivables and large current liabilities.

Other businesses generally can decide which accounting method to use based on the relative tax savings it provides.

INVENTORY VALUATION METHODS.

The method a small business chooses for inventory valuation can also lead to substantial tax savings.
Inventory valuation is important because businesses are required to reduce the amount they deduct for inventory purchases over the course of a year by the amount remaining in inventory at the end of the year. Valuing the remaining inventory differently could increase the amount deducted from income and thus reduce the amount of tax owed by the business.

The tax law provides two possible methods for inventory valuation: the first-in, first-out method (FIFO); and the last-in, first-out method (LIFO). As the names suggest, these inventory methods differ in the assumption they make about the way items are sold from inventory. FIFO assumes that the items purchased the earliest are the first to be removed from inventory, while LIFO assumes that the items purchased most recently are the first to be removed from inventory.
In this way, FIFO values the remaining inventory at the most current cost, while LIFO values the remaining inventory at the earliest cost paid that year.

LIFO is generally the preferred inventory valuation method during times of rising costs. It places a lower value on the remaining inventory and a higher value on the cost of goods sold, thus reducing income and taxes.
On the other hand, FIFO is generally preferred during periods of deflation or in industries where inventory can tend to lose its value rapidly, such as high technology.

EQUIPMENT PURCHASES.
It is often advantageous for small businesses to use this tax incentive to increase their deductions for business expenses, thus reducing their taxable income and their tax liability.
Necessary equipment purchases up to the budget limit can be timed at year end and still the depreciation be fully deductible for the year.

salary PAID TO FAMILY MEMBERS.

are considered a tax deductible business expense for the . Some business owners are able to further reduce their tax burden by paying wages to their spouse/family members. It is important to note, however, that the family member/ spouse must actually work for the business and that the salaries must be reasonable for the work performed.

BENEFITS PLANS AND INVESTMENTS.
Tax planning also applies to various types of employee benefits that can provide a business with tax deductions, such as contributions to life insurance, health insurance, or retirement plans.
fbt is payable on fringe benefits .but the maximum of 20% on such exp.
As an added bonus, many such benefit programs are not considered taxable income for employees.
Finally, tax planning applies to various types of investments that can shift tax liability to future periods, infra structure savings bonds, and deferred annuities etc...
Companies can avoid paying taxes during the current period for income that is reinvested in such tax-deferred instruments.

Tax Planning for Different Business Forms

The first step in tax planning—for small business owners is to select the right form of organization for your enterprise, as one will end up paying radically different amounts of income tax depending on the form you select.
Many aspects of tax planning are specific to certain business forms
some of these are discussed below:

SOLE PROPRIETORSHIPS AND PARTNERSHIPS. Tax planning for sole proprietorships and partnerships is in many ways similar to tax planning for individuals. This is because the owners of businesses organized as sole proprietors and partnerships pay personal income tax rather than business income tax.

CORPORATIONS. Tax planning for corporations is very different than that for sole proprietorships and partnerships. This is because profits earned by corporations accrue to the corporation rather than to the individual owners, or shareholders. A corporation is a separate, taxable entity under the law, and different corporate tax rates apply based on the amount of net income received. In addition to the basic corporate tax, corporations may be subject to surcharge.

Both the owners and employees of corporations receive salaries for their work, and for the the corporation, all such salaries are tax deductible for the corporations.
Many smaller corporations can arrange to pay out all corporate income in salaries and benefits, leaving no income subject to the corporate income tax. ofcurse within reasonable limits not to get attracted by assessing officers.
Many businesses show a loss for a year or more when they first begin operations.
these are used as carry forward loss to offset taxes in future.
iam not able to discuss in detail but can say there are other possible areas of tax planning for any business like
a few tips on...

FBT IS PAYABLE ONLY WHEN EMPLOYER AND EMPLOYEE RELATIONSHIP IS THERE. FRINGE BENEFITS OF DIRECTORS NOT TO COME UNDER FBT AS THEY ARE NOT EMPLOYEES.

PLANNING CASH PAYMENTS TO AVOID DISALLOWANCE UNDER SEC, 40A(3) .

EXPANSION OF BUSINESS BY ADDING ASSET BASE TO CLAIM MORE DEP. AND REDUCE TAX.

PROPER DISTINCTION AND ACCOUNTING BETWEEN REVENUE AND CAPITAL EXP. ADDS ON TO TAX PLANNING.

IN ADDITION AREAS LIKE CLAIMING ADDITIONAL DEP. UNDER INCOME TAX ACT, MERGERS AND DEMERGERS ,CREATION OF TRUSTS ETC....AS TAX PLANNING TOOLS COULD NOT BE DISCUSSED ABOVE IN ANY DETAIL.

I AM SURE MORE OF OUR C.A CLUB MEMBERS ADD MORE INPUTS ON TAX PLANNING.
source:www.answers.com
R.V.RAO

Message likes : 2 times

Upgrade to CAclubindia Pro. Subscribe Now!

roopa

roopa (Querist)
Follow

10 December 2007 Any specific provisions to be looked into for a Construction Firm